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The Basics of 529 College Savings Plans

The Basics on 529 College Savings Plans

By Reyna Gobel on October 30, 2014
Financial Product 101: 529s

529 college savings plans are taxed-advantaged investment plans set up by states as a way for families to save for college. Many states offer benefits to residents, but you can invest in any plan regardless of where you live.

Investments grow federal income tax free, and often state income tax free, in 529 college savings plans. Plus, many states offer tax deductions up to specific dollar amounts on contributions, the money you deposit into an account.

Withdrawing Money from a 529 College Savings Plan

If you withdraw money for anything other than allowed education expenses for the beneficiary—often the child when they’re in college—you could be liable for penalties on the federal and state levels for any tax breaks you were given. So only put what you can afford into 529 college savings plans so that you don’t have to withdraw the money later with tax consequences. That said, there are special exemptions where you can withdraw the 529 plan money without penalty, for example if the child receives a scholarship, or other educational assistance that isn’t a gift or inheritance.

529 Plan Investing

Another way 529 college savings plans differ is the way they’re invested. The investments are often grouped in categories that target a date and get less risky as your child approches college age. Or, the investments target a level of risk that remains the same throughout, or until you change the investments.

Read more on 529 plan investing options

The thinking is that savings accounts aren’t likely to earn the kind of interest you need in order to keep up with the cost of tuition inflation, but you don’t necessarily want to risk what’s in your college savings account in stock market based investments as kids age. In a article John Heywood, principal for Vanguard’s retail investor group says, “The savings account option could make sense for someone close to attending college, but not if your child is 3 years old.”

Your State’s 529 Plan

When deciding between different states’ 529 college savings plans, read your state plan’s website and speak to that plan sponsor’s customer service representatives about options that you feel most comfortable with. Many states offer tax benefits and grant programs, while others offer prepaid 529 tuition plans, where you buy tomorrow’s tuition at today’s price.

Whatever you do, it’s okay to start small and put in what you can afford.

The information contained herein is provided for education and informational purposes only, is general in nature and does not take into account your personal situation. This information is not intended to be and does not constitute financial or investment advice. You should not make any decision – financial, investments or otherwise – based on any of the information presented herein without undertaking independent due diligence and consultation with a competent professional advisor.

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